Triumph for Fortune-Reit

Chueng Kong''s Fortune-Reit launches Hong Kong''s first public CMBS deal.

Li Kai-Shing's Fortune Real Estate Trust (Fortune-Reit) has launched Hong Kong's first public CMBS deal with a triple tranche HK$2.285 billion ($293 million) CMBS via HSBC and DBS. The deal represents the first rated CMBS deal backed by a loan to come out of Hong Kong in four years and signals the return of the CMBS market back to Hong Kong.

The deal, issued via special purpose vehicle Triumph Assets - a limited liability bankruptcy-remote company incorporated in the Cayman Islands, is divided into three tranches.

The triple-A HK$1.735 billion class-A senior tranche, which was marketed to investors at mid to low 20bp range over Hibor, priced at the wider end at 25bp over three-month Hibor. This is equivalent to 15bp over Libor.

The class-B HK$360m double-A rated tranche priced at 45bp over three-month Hibor. The class-C HK$290 single-A rated tranche priced at 60bp over three-month Hibor. All tranches were priced at par.

The notes have a scheduled maturity of five years, with a legal final maturity of 6.5 years. The additional 18-months will allow for disposal of the properties if necessary.

The deal represents the securitisation of a floating rate loan given to Fortune-Reit by the lead managers in June and will be repaid by cash flows from the underling Reit, which consists of 11 retail shopping mall properties in Hong Kong. The centerpiece of the trust is the Metropolis multi-level mall in Hong Hom, Kowloon. Fortune also holds the Ma on Shan Plaza and Shatin City One, both of which are located in Hong Kong's new territories.

As the deal is effectively re-opening a mothballed marketplace, clear-cut benchmarks are on thin ground. A similarly structured deal is the five-year Eu320 million CMBS from Suntec REIT - another Li Ka-shing endeavour, which was launched in March. Although not a true comparison as Suntec-Reit is backed by Singapore-based property which is much less volatile than the Hong Kong property market, it priced at 16bp over Libor which many observers considered very aggressive and was trading around its par level at time of Fortune's pricing. The swap between US$ Libor and Hibor is worth about 4bp.

Bankers familiar with the deal believed that the spread of 40bp between the triple-A and single-A tranches was inline with expectations and lauded the deal's significance to the Hong Kong-based CMBS market.

Not surprisingly, the Li Ka-shing brand helped to sell the deal domestically, with Hong Kong-based accounts accounting for the majority of the placement. Singapore investors made up a small portion of the total book.

Fortune-REIT is listed on the Singapore exchange having gone public two years ago. Cheung Kong, which owns 53% of Fortune, opted to list in Singapore because of the more relaxed regulations and attractive tax exemptions. Singapore-based Reits do not pay income tax, nor do investors pay taxes on dividend payments.

As yet, there are no Reits listed in Hong Kong. The first, a $2.7 billion trust from the Hong Kong Government, was scuttled after a legal challenge levied by a 67-year old public housing advocate and tenant held up the offering for almost two years. On Wednesday the Court of Final Appeal decided in favour of the Hong Kong Housing Authority, which is expected to float the Hong Kong Link Reit in the next few months.

Furthermore, in an effort to entice new listings, Hong Kong regulators have relaxed its rules pertaining to listed Reits. Allowing trusts to hold overseas property and borrow up to 45% of the value of the property held in the trust.

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